Form: 10-Q/A

Quarterly report pursuant to Section 13 or 15(d)

October 7, 2002

10-Q/A: Quarterly report pursuant to Section 13 or 15(d)

Published on October 7, 2002

================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q/A

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MARCH 31, 2002

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-9819


DYNEX CAPITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)



VIRGINIA 52-1549373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4551 COX ROAD, SUITE 300, GLEN ALLEN, VIRGINIA 23060
(Address of principal executive offices) (Zip Code)

(804) 217-5800
(Registrant`s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
|X| YES |_|NO

On April 30, 2002, the registrant had 10,873,853 shares of common stock of $.01
value outstanding, which is the registrant's only class of common stock.

================================================================================
DYNEX CAPITAL, INC.
FORM 10-Q


INDEX

THIS FILING OF FORM 10-Q/A REFLECTS RESTATEMENT OF THE FINANCIAL STATEMENTS AS
DISCUSSED IN NOTE 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS.

Page
PART I FINANCIAL INFORMATION



Item 1. Financial Statements


Condensed Consolidated Balance Sheets at March 31, 2002
and December 31, 2001 (unaudited)........................................................1

Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 (unaudited)................................................2

Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2002 and 2001 (unaudited)...............................3

Notes to Unaudited Condensed Consolidated Financial Statements...........................4

Item 2. Management`s Discussion and Analysis of
Financial Condition and Results of Operations...........................................10

Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................23


PART II OTHER INFORMATION

Item 1. Legal Proceedings ......................................................................24

Item 2. Changes in Securities and Use of Proceeds...............................................24

Item 3. Defaults Upon Senior Securities.........................................................25

Item 4. Submission of Matters to a Vote of Security Holders.....................................25

Item 5. Other Information.......................................................................25

Item 6. Exhibits and Reports on Form 8-K........................................................25


SIGNATURES ........................................................................................26



i


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

DYNEX CAPITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS, UNAUDITED
(amounts in thousands except share data)

March 31, December 31,
2002 2001
----------- ------------
(As restated,
see Note 12)
ASSETS

Investments:
Collateral for collateralized bonds ................................... $ 2,310,625 $ 2,473,203
Other investments ..................................................... 61,780 63,553
Securities ............................................................ 6,190 5,508
Loans ................................................................. 7,428 7,315
----------- -----------
2,386,023 2,549,579
Cash .................................................................... 4,466 7,129
Cash -- restricted ...................................................... 12,550 4,334
Other assets ............................................................ 8,117 8,817
----------- -----------
$ 2,411,156 $ 2,569,859
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Non-recourse debt - collateralized bonds ................................ $ 2,118,044 $ 2,264,213
Recourse debt ........................................................... 46,975 58,134
----------- -----------
2,165,019 2,322,347
Accrued interest payable ................................................ 771 2,099
Accrued expenses and other liabilities .................................. 1,477 3,303
----------- -----------
2,167,267 2,327,749
----------- -----------
Commitments and contingencies (Note 10) ................................. -- --
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 50,000,000 shares authorized:
9.75% Cumulative Convertible Series A,
992,038 and 992,038 issued and outstanding, respectively
($29,903 and $29,322 aggregate liquidation preference, respectively) 22,658 22,658

9.55% Cumulative Convertible Series B,
1,378,807 and 1,378,807 issued and outstanding, respectively
($42,084 and $41,443 aggregate liquidation preference, respectively) 32,275 32,275
9.73% Cumulative Convertible Series C,
1,383,532 and 1,383,532 issued and outstanding, respectively
($51,865 and $51,101 aggregate liquidation preference, respectively) 39,655 39,655
Common stock, par value $.01 per share,
100,000,000 shares authorized,
10,873,853 issued and outstanding ..................................... 109 109
Additional paid-in capital .............................................. 364,740 364,740
Accumulated other comprehensive loss .................................... (13,527) (14,825)
Accumulated deficit ..................................................... (202,021) (202,502)
----------- -----------
243,889 242,110
----------- -----------
-----------
$ 2,411,156 $ 2,569,859
=========== ===========

See notes to unaudited condensed consolidated financial statements.



1


DYNEX CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS, UNAUDITED
(amounts in thousands except share data)

Three Months Ended
March 31,
------------------------------------------------
2002 2001
-------------------- ---------------------
(As restated, (As restated,
see Note 12) see Note 12)
-------------------- ---------------------

Interest income:
Collateral for collateralized bonds $ 42,714 $ 61,114
Securities 122 309
Other investments 10 1,928
Loans 94 153
-------------------- ---------------------
42,940 63,504
-------------------- ---------------------

Interest and related expense:
Non-recourse debt 31,966 50,125
Recourse debt 1,030 2,587
Other 444 363
-------------------- ---------------------
33,440 53,075
-------------------- ---------------------

Net interest margin before provision for losses 9,500 10,429
Provision for losses (5,643) (4,806)
-------------------- ---------------------
Net interest margin 3,857 5,623

Net (loss) gain on sales, write-downs, (2,055) 5,304
impairment charges, and litigation
Other income 196 295
-------------------- ---------------------
1,998 11,222

General and administrative expenses (1,894) (1,844)
-------------------- ---------------------
Income before extraordinary item 104 9,378

Extraordinary item - gain on extinguishment of debt 377 2,271
-------------------- ---------------------
Net income 481 11,649
Preferred stock charges (2,396) (3,228)
-------------------- ---------------------
Net (loss) income applicable to common shareholders $ (1,915) $ 8,421
==================== =====================

(Loss) income per common share before extraordinary item:
Basic and diluted $ (0.21) $ 0.54
==================== =====================

Net (loss) income per common share:
Basic and diluted $ (0.18) $ 0.74
==================== =====================

Weighted average number of common shares outstanding
Basic and diluted 10,873,853 11,446,206


See notes to unaudited condensed consolidated financial statements.


2


DYNEX CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS, UNAUDITED
(amounts in thousands)

Three Months Ended
March 31,
----------------------------------------
2002 2001
------------------- ------------------
(As restated, (As restated,
see Note 12) see Note 12)
------------------- ------------------

Operating activities:
Net income $ 481 $ 11,649
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for losses 5,643 4,806
Net (gain) loss on sales, write-downs, impairment charges and 2,055 (5,304)
litigation
Extraordinary item - net gain on extinguishment of debt (377) (2,271)
Payment (made) received from litigation settlement, net of legal fees (863) 7,111
Amortization and depreciation 4,181 3,942
Decrease in accrued interest receivable 2 257
Change in accrued interest payable (519) 437
Net change in restricted cash (8,216) 20,301
Net change in accrued interest, other assets and other liabilities (2,839) (14,810)
------------------- ------------------
Net cash (used) provided by operating activities (452) 26,118
------------------- ------------------
Investing activities:
Principal payments on collateral 151,283 142,581
Net (increase) decrease in funds held by trustee (152) 104
Net decrease in loans held for sale or securitization 1,621 15,707
Purchase of other investments (38) -
Payments received on other investments 2,602 554
Proceeds from sales of other investments - 233
Payments received on securities 393 276
Proceeds from sale of loan production operations - 9,500
Capital expenditures (2) (88)
------------------- ------------------
Net cash provided by investing activities 155,707 168,867
------------------- ------------------
Financing activities:
Principal payments on bonds (147,090) (143,653)
Repayment of senior notes (10,828) (34,519)
------------------- ------------------
Net cash used for financing activities (157,918) (178,172)
------------------- ------------------
Net (decrease) increase in cash (2,663) 16,813
Cash at beginning of period 7,129 3,485
------------------- ------------------
Cash at end of period $ 4,466 $ 20,298
=================== ==================
Cash paid for interest $ 34,968 $ 57,237
=================== ==================

See notes to unaudited condensed consolidated financial statements.



3
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DYNEX CAPITAL, INC.

March 31, 2002
(amounts in thousands except share data)


NOTE 1--BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. The condensed consolidated financial statements
include the accounts of Dynex Capital, Inc. and its qualified REIT subsidiaries
and taxable REIT subsidiary ("Dynex" or the "Company"). All significant
inter-company balances and transactions have been eliminated in consolidation of
Dynex.

In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
condensed consolidated financial statements have been included. The Condensed
Consolidated Balance Sheet at March 31, 2002, the Condensed Consolidated
Statements of Operations for the three months ended March 31, 2002 and 2001, the
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 2002 and 2001 and related notes to consolidated financial statements are
unaudited. Operating results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the audited consolidated
financial statements and footnotes included in the Company's Form 10-K/A for the
year ended December 31, 2001.

Certain reclassifications have been made to the financial statements for 2001 to
conform to presentation for 2002.

Cash - Restricted. At March 31, 2002 and December 31, 2001, respectively,
$12,550 and $4,334 of cash was held in trust to cover losses on securities not
otherwise covered by insurance or was held in trust as collateral for the
payment of principal on the Senior Notes. As a result of an amendment to the
indenture governing the Company's senior notes due July 2002 (the "Senior
Notes") entered into in March 2001 and a settlement agreement entered into in
October 2001 with ACA Financial Guaranty Corporation (ACA), the Company's
ability to make distributions on its capital stock and to reinvest cash flow
from its investment portfolio and other assets are materially restricted (the
amendment to the indenture and the settlement agreement, collectively the
"Senior Note Agreements"). Until the Senior Notes are defeased or fully repaid,
the Senior Note Agreements effectively restrict the Company from making any new
distributions on its capital stock, or from making any new investments, except
to call securities previously issued by the Company. In addition, as a result of
the Senior Note Agreements, the Company has pledged substantially all its assets
(including the stock of its material subsidiaries) to the indenture trustee and
deposits cash in excess of a working capital balance of $3,000 into a restricted
account.


NOTE 2 - USE OF ESTIMATES

Fair Value. The Company uses estimates in establishing fair value for its
financial instruments. Estimates of fair value for financial instruments may be
based on market prices provided by certain dealers. Estimates of fair value for
certain other financial instruments are determined by calculating the present
value of the projected cash flows of the instruments using appropriate discount
rates, prepayment rates and credit loss assumptions. Collateral for
collateralized bonds make up a significant portion of the Company's investments.
The estimate of fair value for collateral for collateralized bonds is determined
by calculating the present value of the projected cash flows of the instruments,
using discount rates, prepayment rate assumptions and credit loss assumptions
established by management. The discount rate used in the determination of fair
value of the collateral for collateralized bonds was 16% at March 31, 2002 and
December 31, 2001. Prepayment rate assumptions at March 31, 2002, and December


4
31, 2001, were generally at a "constant prepayment rate," or CPR ranging from
35%-60% for both 2002 and 2001, respectively, for collateral for collateralized
bonds consisting of single-family mortgage loans and securities, and a CPR
equivalent ranging from 9%-10% for both 2002 and 2001, respectively for
collateral for collateralized bonds consisting of manufactured housing loans and
securities collateral. Commercial mortgage loan collateral was generally assumed
to repay in accordance with their contractual terms. CPR assumptions for each
year are based in part on the actual prepayment rates experienced for the prior
six-month period and in part on management's estimate of future prepayment
activity. The loss assumptions utilized vary for each series of collateral for
collateralized bonds, depending on the collateral pledged. The cash flows for
the collateral for collateralized bonds were projected to the estimated date
that the security could be called and retired by the Company if there is
economic value to the Company in calling and retiring the security. Such call
date is typically triggered on the earlier of a specified date or when the
remaining collateral balance equals 35% of the original balance (the "Call
Date"). The Company estimates anticipated market prices of the underlying
collateral at the Call Date.

As discussed in Note 6, the Company estimated the fair value of certain other
investments as the present value of expected future cash flows, less costs to
service such investments, discounted at a rate of 12%.

Estimates of fair value for other financial instruments are based primarily on
management's judgment. Since the fair value of Dynex's financial instruments is
based on estimates, actual gains and losses recognized may differ from those
estimates recorded in the consolidated financial statements.


NOTE 3--NET INCOME PER COMMON SHARE

Net income per common share is presented on both a basic net income per common
share and diluted net income per common share basis. Diluted net income per
common share assumes the conversion of the convertible preferred stock into
common stock, using the if-converted method, and stock appreciation rights to
the extent that there are rights outstanding, using the treasury stock method,
but only if these items are dilutive. As a result of the two-for-one split in
May 1997 and the one-for-four reverse split in July 2000 of Dynex's common
stock, the preferred stock is convertible into one share of common stock for two
shares of preferred stock.


5
The following table reconciles the numerator and denominator for both the basic
and diluted net income per common share for the three months ended March 31,
2002 and 2001.



- -------------------------------------------------- --------------------------------------------------------------------
Three Months Ended March 31,
--------------------------------------------------------------------
2002 2001
- -------------------------------------------------- ------------------------------- -- ---------------------------------
Weighted-Average Weighted-Average
Number of Number of
Income Shares Income Shares
(loss) (loss)
------------- ------------- -------------- --------------


Income before extraordinary item $ 104 $ 9,378

Extraordinary item - net gain on
extinguishment of debt 377 2,271
------------- -------------
Net income 481 11,649
Preferred stock charges (2,396) (3,228)

Net (loss) income applicable to $ (1,915) 10,873,853 $ 8,421 11,446,206
common shareholders
Effect of dividends and additional shares
of Series A, Series B, and Series C
preferred stock - - - -
Diluted $ (1,915) 10,873,853 $ 8,421 11,446,206
============= ============= ============== ==============

(Loss) income per share before extraordinary item:
Basic EPS $ (0.21) $ 0.54
============= ==============
Diluted EPS $ (0.21) $ 0.54
============= ==============

Net (loss) income per share:
Basic EPS $ (0.18) $ 0.74
============= ==============
Diluted EPS $ (0.18) $ 0.74
============= ==============


Dividends and potentially dilutive common shares
assuming conversion of preferred stock:
Series A $ 580 496,019 $ 766 654,531
Series B 806 689,404 1,119 956,217
Series C 1,010 691,766 1,343 920,000
------------- ------------- -------------- --------------
$ 2,396 1,877,189 $ 3,228 2,530,748
============= ============= ============== ===============

- -------------------------------------------------- ------------- --- ------------- -- -------------- --- --------------



6
NOTE 4 -- COLLATERAL FOR COLLATERALIZED BONDS

The following table summarizes the components of collateral for collateralized
bonds as of March 31, 2002 and December 31, 2001:

- ------------------------------------------ --------------- ---- ----------------
March 31, 2002 December 31,
2001
- ------------------------------------------ --------------- ---- ----------------

Loans, at amortized cost $ 1,913,182 $ 2,027,619
Debt securities, at fair value 419,892 467,038
- ------------------------------------------ --------------- ---- ----------------
2,333,074 2,494,657
Reserve for loan losses (22,449) (21,454)
- ------------------------------------------ --------------- ---- ----------------
$ 2,310,625 $ 2,473,203
- ------------------------------------------ --------------- ---- ----------------

The following table summarizes the amortized cost basis, gross unrealized gains
and losses and estimated fair value of debt securities pledged as collateral for
collateralized bonds as of March 31, 2002 and December 31, 2001 :

-------------------------------------- -------------- -------------------
March 31, 2002 December 31, 2001
-------------------------------------- -------------- -------------------

Debt securities, at amortized cost $ 416,794 $ 463,666
Gross unrealized gains 3,098 3,372
Gross unrealized losses - -
-------------------------------------- -------------- -------------------
Estimated fair value $ 419,892 $ 467,038
-------------------------------------- -------------- -------------------

The components of collateral for collateralized bonds at March 31, 2002 and
December 31, 2001 are as follows:

- --------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
-------------- -----------------
Collateral, net of allowance $ 2,271,229 $ 2,429,968
Funds held by trustees 542 391
Accrued interest receivable 15,294 16,594
Unamortized premiums and discounts, net 20,462 22,878
Unrealized gain, net 3,098 3,372
- --------------------------------------------------------------------------------
$ 2,310,625 $ 2,473,203
- --------------------------------------------------------------------------------

Collateral for collateralized bonds. Collateral for collateralized bonds
consists primarily of loans and securities backed by adjustable-rate and
fixed-rate mortgage loans secured by first liens on single family housing,
fixed-rate loans on multifamily and commercial properties and manufactured
housing installment loans secured by either a UCC filing or a motor vehicle
title. All collateral for collateralized bonds is pledged to secure repayment of
the related collateralized bonds. All principal and interest (less
servicing-related fees) on the collateral is remitted to a trustee and is
available for payment on the collateralized bonds.


7
NOTE 5 -- SECURITIES

The following table summarizes Dynex's amortized cost basis and fair value of
investments classified as available-for-sale, as of March 31, 2002 and December
31, 2001:

- -------------------------------------------- --------------- --- ---------------
March 31, December 31,
2002 2001
- -------------------------------------------- --------------- --- ---------------

Securities:
Adjustable-rate mortgage securities $ 600 $ 600
Fixed-rate mortgage securities 575 351
Derivative and residual securities 4,688 4,358
- -------------------------------------------- --------------- --- ---------------
5,863 5,309
Allowance for losses (55) (55)
------------------------------------------- --------------- --- ---------------
Amortized cost, net 5,808 5,254
Gross unrealized gains 2,273 2,134
Gross unrealized losses (1,891) (1,880)
- -------------------------------------------- --------------- --- ---------------
$ 6,190 $ 5,508
- -------------------------------------------- --------------- --- ---------------

Securities. Adjustable-rate mortgage ("ARM") securities consist of mortgage
certificates secured by ARM loans. Fixed-rate mortgage securities consist of
mortgage certificates secured by mortgage loans that have a fixed rate of
interest for at least one year from the balance sheet date. Derivative
securities are classes of collateralized bonds, mortgage pass-through
certificates or mortgage certificates that pay to the holder substantially all
interest (i.e., an interest-only security), or substantially all principal
(i.e., a principal-only security). Residual interests represent the right to
receive the excess of (i) the cash flow from the collateral pledged to secure
related mortgage-backed securities, together with any reinvestment income
thereon, over (ii) the amount required for principal and interest payments on
the mortgage-backed securities or repurchase arrangements, together with any
related administrative expenses.


NOTE 6 -- OTHER INVESTMENTS

The following table summarizes the Company's investment in delinquent property
tax receivables and real estate owned as of March 31, 2002 and December 31,
2001:



- -------------------------------------------------------------- ------------------ ------------------
March 31, 2002 December 31, 2001
------------------ ------------------


Amortized cost basis of receivables, before discount $ 72,465 $ 75,805
Discount recorded as adjustment to other comprehensive loss (17,007) (18,451)
- -------------------------------------------------------------- ------------------ ------------------
Amortized cost basis of receivables, net 55,458 57,354
Real estate owned 6,091 5,928
Other 231 271
- -------------------------------------------------------------- ------------------ ------------------
$ 61,780 $ 63,553
- -------------------------------------------------------------- ------------------ ------------------


Other investments at March 31, 2002 and December 31, 2001 consist primarily of
delinquent property tax receivables and related real estate owned. Delinquent
property tax receivables have been classified as non-accrual, and all cash
collections on such receivables is used to amortize the principal balance of the
Company's investment. During the three months ended March 31, 2002, the Company
collected $4.0 million. The Company also amortized $1.4 million of discount on
the carrying value of the delinquent property tax receivables as a reduction to
accumulated other comprehensive loss.


8

NOTE 7 -- RECOURSE DEBT

The following table summarizes Dynex's recourse debt outstanding at March 31,
2002 and December 31, 2001:

- ---------------------------- --------------------- --- -------------------------
March 31, 2002 December 31, 2001
- ---------------------------- --------------------- --- -------------------------

7.875% Senior Notes $ 46,830 $ 57,969
Capital lease obligations 178 244
Capital costs (33) (79)
- ---------------------------- --------------------- --- -------------------------
$ 46,975 $ 58,134
- ---------------------------- --------------------- --- -------------------------

As of March 31, 2002 and December 31, 2001, Dynex had $46,830 and $57,969,
respectively, outstanding of its Senior Notes. On March 30, 2001, the Company
entered into an amendment to the related indenture governing the Senior Notes
whereby the Company pledged to the Trustee of the Senior Notes substantially all
of the Company's unencumbered assets in its investment portfolio and the stock
of its subsidiaries. In consideration of this pledge, the indenture was further
amended to provide for the release of the Company from certain covenant
restrictions in the indenture, and specifically provided for the Company's
ability to make distributions on its capital stock in an amount not to exceed
the sum of (i) $26,000, (ii) the cash proceeds of any "permitted subordinated
indebtedness", (iii) the cash proceeds of the issuance of any "qualified capital
stock", and (iv) any distributions required in order for the Company to maintain
its REIT status. In addition, the Company entered into a Purchase Agreement with
holders of 50.1% of the Senior Notes which requires the Company to purchase, and
such holders to sell, their respective Senior Notes at various discounts prior
to maturity based on a computation of the Company's available cash. During the
quarter ended March 31, 2002, the Company completed the purchase of all amounts
required pursuant to the Purchase Agreement and fulfilled all its obligations
thereunder. In addition, the Company has purchased Senior Notes in the open
market from time-to-time. In April 2002, the Company purchased an additional
$550 of Senior Notes, and as of April 30, 2002, the remaining principal amount
of the Senior Notes outstanding is $46,280.


NOTE 8 -- RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting StandardS (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No. 142 provides that intangible assets with finite useful lives be amortized
and that goodwill and intangible assets with indefinite lives will not be
amortized, but will rather be tested at least annually for impairment. As the
Company has no goodwill or intangible assets that it is amortizing, the adoption
of SFAS No. 142 did not have any effect on the financial position, results of
operations or cash flows of the Company.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company does not believe the
adoption of SFAS No. 143 will have a significant impact on the financial
position, results of operations or cash flows of the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, "Reporting the Results of Operations - Reporting and Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB 30)" for the disposal of a segment of
business. This statement is effective for fiscal years beginning after December
15, 2001. SFAS No. 144 retains many of the provisions of SFAS No. 121, but


9
addresses certain implementation issues associated with that Statement. The
adoption of SFAS No. 144 did not have a significant impact on the financial
position, results of operations or cash flows of the Company.

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44 and 64, Amendment of SFAS No. 13 and Technical Corrections". Effective
January 1, 2003, SFAS No. 145 requires gains and losses from the extinguishment
or repurchase of debt to be classified as extraordinary items only if they meet
the criteria for such classification in APB 30. Until January 1, 2003, gains and
losses from the extinguishment or repurchase of debt must be classified as
extraordinary items, as Dynex has done. After January 1, 2003, any gain or loss
resulting from the extinguishment or repurchase of debt classified as an
extraordinary item in a prior period that does not meet the criteria for such
classification under APB Opinion 30 must be reclassified. The Company is in the
process of evaluating SFAS No. 145 but believes it will not have a significant
impact on the financial position, results of operations or cash flows of the
Company.


NOTE 9 -- PREFERRED STOCK

As of March 31, 2002 and December 31, 2001, the total liquidation preference on
the Preferred Stock was $123,852 and $121,867, respectively, and the total
amount of dividends in arrears on Preferred Stock were $25,167 and $22,771,
respectively. Individually, the amount of dividends in arrears on the Series A,
the Series B and the Series C were $6,094 ($6.14 per Series A share), $8,469
($6.14 per Series B share) and $10,604 ($7.66 per Series C share), respectively
at March 31, 2002 and $5,513 ($5.56 per Series A share), $7,663 ($5.56 per
Series B share) and $9,595 ($6.94 per Series C share), respectively at December
31, 2001.


NOTE 10 -- COMMITMENTS AND CONTINGENCIES

GLS Capital, Inc. ("GLS"), a subsidiary of the Company, together with the County
of Allegheny, Pennsylvania ("Allegheny County"), were defendants in a lawsuit in
the Commonwealth Court of Pennsylvania (the "Commonwealth Court") wherein the
plaintiffs challenged the right of Allegheny County and GLS to collect certain
interest, costs and expenses related to delinquent property tax receivables in
Allegheny County. This lawsuit was related to the purchase by GLS of delinquent
property tax receivables from Allegheny County in 1997, 1998, and 1999 for
approximately $58,258. On July 5, 2001, the Commonwealth Court ruling addressed,
among other things, (i) the right of the Company to charge to the delinquent
taxpayer a rate of interest of 12% versus 10% on the collection of its
delinquent property tax receivables, (ii) the charging of attorney's fees to the
delinquent taxpayer for the collection of such tax receivables, and (iii) the
charging to the delinquent taxpayer of certain other fees and costs. The
Commonwealth Court remanded for further consideration to the Court of Common
Pleas items (i) and (iii), and ruled that neither Allegheny County nor GLS had
the right to charge attorney's fees to the delinquent taxpayer related to the
collection of such tax receivables, reversing the Court of Common Pleas
decision. The Pennsylvania Supreme Court has accepted the Application for
Extraordinary Jurisdiction filed by Allegheny County and GLS. No damages have
been claimed in the action; however, the decision may impact the ultimate amount
recoverable on the delinquent property tax receivables, including attorney fees
incurred in the collection process. To date, GLS has incurred attorneys fees of
approximately $2,000 related to foreclosures on such delinquent property tax
receivables, approximately $1,000 of which have been reimbursed to GLS by the
taxpayer or through liquidation of the underlying real property.

The Company is also subject to other lawsuits or claims which have arisen in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the


10
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.


NOTE 11 -- RELATED PARTY TRANSACTIONS

The Company has made a loan to Thomas H. Potts, president of the Company, as
evidenced by a demand promissory note (the "Potts Note"). Mr. Potts directly
owns 399,502 shares of common stock of the Company, all of which have been
pledged as collateral to secure the Potts Note. Interest is charged on the Potts
Note at the applicable short-term monthly applicable federal rate (commonly
known as the AFR Rate) as published by the Internal Revenue Service. As of March
31, 2002 and December 31, 2001, the outstanding balance of the Potts Note was
$262 and $369, respectively, and interest was current.


NOTE 12 - RESTATEMENT OF FINANCIAL STATEMENTS

Subsequent to the issuance of its financial statements for the quarter ended
March 31, 2002, the Company determined that certain of the assets previously
reported as debt securities subject to the requirements of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" were, in
fact, collateralized borrowings, where the collateral being pledged as
securities were loans that should have been accounted for under the requirements
of SFAS No. 5, "Accounting for Contingencies" or SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." As a result, the accompanying condensed
consolidated financial statements as of March 31, 2002, and for the three month
periods ended March 31, 2002 and 2001, have been restated from the amounts
previously reported to correct the accounting for these investments.

A summary of the significant effects of the restatement is as follows:

- ------------------------------------- -----------------------------------------
(amounts in thousands) As of March 31, 2002

- ------------------------------------- -----------------------------------------
(As Previously
Reported) (As Restated)
- ------------------------------------- ---------------------- ------------------
Collateral for collateralized bonds $ 2,248,716 $ 2,310,625
Total investments 2,324,114 2,386,023
Total assets 2,349,247 2,411,156

Accumulated other comprehensive loss (75,437) (13,527)
Total Shareholders' Equity 181,980 243,889
- ------------------------------------- ---------------------- ------------------


For the Three Months Ended March 31,
2002 2001
----------------------------- ----------------------------
(As Previously (As Previously
Reported) (As Restated) Reported) (As Restated)
- --------------------- -------------- -------------- ------------- --------------
Provision for losses $ (7,604) $ (5,643) $ (6,589) $ (4,806)
Net interest margin 1,895 3,857 3,837 5,623
Impairment charges (94) (2,055) 7,087 5,304
- --------------------- -------------- -------------- ------------- --------------

The restatement did not have any effect on income before extraordinary
items or net income.


11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

As discussed in Note 12 to the condensed consolidated financial statements
included in Item 1, the Company has restated its financial statements for the
three month periods ended March 31, 2002 and 2001. The following management
discussion and analysis takes into account the effects of the restatement.

The Company is a financial services company, which invests in a portfolio of
securities and investments backed principally by single family mortgage loans,
commercial mortgage loans, manufactured housing installment loans and delinquent
property tax receivables. These loans were funded primarily by the Company's
loan production operations or purchased in bulk in the market. Historically, the
Company's loan production operations have included single-family mortgage
lending, which was sold in 1996, commercial mortgage lending and manufactured
housing lending. Through its specialty finance business, the Company also has
provided for the purchase and leaseback of single family model homes to builders
and the purchase and management of delinquent property tax receivables. Loans
funded through the Company's production operations have generally been pooled
and pledged (i.e. securitized) as collateral for non-recourse bonds
("collateralized bonds"), which provided long-term financing for such loans
while limiting credit, interest rate and liquidity risk. The Company has elected
to be treated as a real estate investment trust ("REIT") for federal income tax
purposes under the Internal Revenue Code of 1986, as amended, and, as such, must
distribute substantially all of its taxable income to shareholders. Provided
that the Company meets all of the prescribed Internal Revenue Code requirements
for a REIT, the Company will generally not be subject to federal income tax.

The Company owns the right to call adjustable-rate and fixed-rate mortgage
pass-through securities previously issued and sold by the Company once the
outstanding balance of such securities reaches a call trigger, generally either
10% or less of the original amount issued or a specified date. At March 31,
2002, the aggregate callable balance of such securities at the time of the
projected call is approximately $228 million, relating to 20 securities. The
Company may or may not elect to call one or more of these securities when
eligible to call. During the first four months of 2002, the Company initiated
the call of twelve securities with a balance of $143 million. All securities
acquired pursuant to such calls were included in a securitization completed by
the Company in April 2002. The Company may call additional securities in the
future.

On April 25, 2002, the Company completed the issuance of $605 million of
collateralized bonds. These bonds were collateralized by single-family loans
aggregating $602 million, $447 million of which were loans already owned by the
Company and $155 million of which represented new loans from the purchase of
mortgage backed securities from third parties pursuant to certain call rights
owned by the Company. The transaction will be accounted for as a financing; thus
the loans and associated bonds will be included in the Company's second quarter
2002 consolidated balance sheet as assets and liabilities of the Company. Cash
proceeds from the securitization, net of related costs, was approximately $22
million. The Company will use the proceeds from the securitization toward
repayment of the Senior Notes due July 15, 2002. Approximately $11 million of
foreclosure loans and real estate owned were not included in the transaction and
will be retained by the Company.

Separately, the Company announced that the financial advisor it engaged to
assist in evaluating the feasibility of the Company forming or acquiring a
depository institution has recommended that the Company pursue the acquisition
of an existing thrift institution. The financial advisor recommended initially
targeting a thrift institution with assets of $200 million to $300 million
located in Virginia or neighboring areas. The advisor recommended that the
Company would then acquire similar-sized institutions over the next three to
five years in order to reach $1 billion in assets over that time frame. As a
result of this recommendation, the Company plans to continue its evaluation of a
depository institution business plan. While the Company plans to continue its
evaluation, there are no definitive plans at this time for the Company to
acquire a thrift.


12
FINANCIAL CONDITION
(amounts in thousands)

---------------------------------------- ----------------- --------------------
March 31, 2002 December 31, 2001
---------------------------------------- ----------------- --------------------
Investments:
Collateral for collateralized bonds $ 2,310,625 $ 2,473,203
Securities 6,190 5,508
Other investments 61,780 63,553
Loans 7,428 7,315

Non-recourse debt - collateralized bonds 2,118,044 2,264,213
Recourse debt 46,975 58,134

Shareholders' equity 243,889 242,110

COLLATERAL FOR COLLATERALIZED BONDS

Collateral for collateralized bonds consists primarily of loans and securities
backed by adjustable-rate and fixed-rate mortgage loans secured by first liens
on single family housing, fixed-rate loans secured by first liens on multifamily
and commercial properties, and manufactured housing installment loans secured by
either a UCC filing or a motor vehicle title. As of March 31, 2002, the Company
had 23 series of collateralized bonds outstanding. The collateral for
collateralized bonds decreased to $2.31 billion at March 31, 2002 compared to
$2.47 billion at December 31, 2001. This decrease of $0.16 billion is primarily
the result of $151.3 million in paydowns on the collateral.

Below is a summary as of March 31, 2002, by each series where the fair value
exceeds $0.5 million of the Company's net investment in collateralized bond
securities. The Company master services the majority of its collateralized bond
securities. Monthly payment reports for those securities master-serviced by the
Company may be found on the Company's website at www.dynexcapital.com.



- ----------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Principal
Principal balance of Principal Amortized Cost
balance of collateralized Balance of Basis of Net
Collateralized Bond Collateral Type collateral bonds Net Investment Investment
Series (1) pledged outstanding to
third parties
- ----------------------------------------------------------------------------------------------------------------------


MERIT Series 11A Single-family loans;
manufactured housing loans $ 409,988 $ 363,042 $ 46,946 $ 51,000

MERIT Series 12-1 Manufactured housing loans 276,742 247,535 29,207 23,169

MERIT Series 12-2 Single-family loans 331,540 311,178 20,362 33,908

MERIT Series 13 Manufactured housing loans 335,463 293,202 42,261 37,757

MERIT Series 14-1 Single-family loans 136,855 135,936 919 4,033

MERIT Series 14-2 Single-family loans 2,643 - 2,643 2,687

MCA One Series 1 Commercial mortgage loans 86,187 81,444 4,743 (478)

CCA One Series 2 Commercial mortgage loans 298,791 276,688 22,103 8,445

CCA One Series 3 Commercial mortgage loans 413,399 368,111 45,288 57,169
- ----------------------------------------------------------------------------------------------------------------------
$ 2,291,608 $ 2,077,136 $ 214,472 $ 217,690
- ----------------------------------------------------------------------------------------------------------------------


(1) MERIT stands for MERIT Securities Corporation; MCA stands for
Multifamily Capital Access One, Inc. (now known as Commercial Capital Access
One, Inc.); and CCA stands for Commercial Capital Access One, Inc. Each such
entity is a wholly owned limited purpose subsidiary of the Company.

The following table summarizes the fair value of the Company's net investment in
collateralized bond securities, the various assumptions made in estimating
value, the unrealized gain (loss) on the Company's net investment and the cash
flow received from such net investment during the first quarter of 2002.


13


Fair Value Assumptions
- ---------------------------------------------------------------------------------------------------------------------
Cash flows
Weighted-average Projected cash Fair value received in
Collateralized Bond prepayment speeds Losses flow termination of net 2002, net (2)
Series date investment
(1)
- ---------------------------------------------------------------------------------------------------------------------


MERIT Series 11A 40%-60% CPR on SF
loans; 10% CPR 3.5% annually on Anticipated final
on MH loans MH loans maturity in 2025 $ 48,105 $ 6,864

MERIT Series 12-1 9% CPR 2.8% annually on Anticipated final
MH Loans maturity in 2027 3,371 127

MERIT Series 12-2 35% CPR 0.55% annually Anticipated call
date in 2002 (3) 34,966 8,979

MERIT Series 13 10% CPR 4.0% annually Anticipated
final maturity in 3,712 134
2026

MERIT Series 14-1 35% CPR 0.2% annually Anticipated call
date in 2002 (3) 7,397 1,800

MERIT Series 14-2 50% CPR 10.0% annually Anticipated call
date in 2002 (3) 2,617 501

MCA One Series 1 (4) Losses of $2,096 in Anticipated
2004, $1,500 in final maturity in 1,711 15
2006 and $1,000 in 2018
2008

CCA One Series 2 (5) 0.60% annually Anticipated call
beginning in 2003 date in 2012 8,005 430

0.60% annually Anticipated call
CCA One Series 3 (5) beginning in 2004 date in 2009 20,755 614
- ---------------------------------------------------------------------------------------------------------------------
$ 130,639 $ 19,464
- ---------------------------------------------------------------------------------------------------------------------


(1) Calculated as the net present value of expected future cash flows,
discounted at 16%. Expected cash flows were based on the level of interest
rates as of March 31, 2002, and incorporates the resetting of the interest
rates on the adjustable rate assets to a level consistent with the
respective index level as of March 31, 2002. Increases or decreases in
interest rates and index levels from March 31, 2002 would impact the
calculation of fair value, as would differences in actual prepayment speeds
and credit losses versus the assumptions set forth above.
(2) Cash flows received by the Company during the year, equal to the excess of
the cash flows received on the collateral pledged, over the cash flow
requirements of the collateralized bond security
(3) These series were called in April 2002
(4) Computed at 0% CPR through June 2008, then 20% CPR thereafter
(5) Computed at 0% CPR until the respective call date


14
The following table compares the fair value of these investments at various
discount rates, but otherwise using the same assumptions as set forth for the
two immediately preceding tables:

- --------------------------------------------------------------------------------
Fair Value of Net Investment
- --------------------------------------------------------------------------------
Collateralized Bond Series ...... 12% 16% 20% 25%
MERIT Series 11A ................ $ 53,985 $ 48,105 $ 43,411 $ 38,733
MERIT Series 12-1 ............... 3,492 3,371 3,213 3,000
MERIT Series 12-2 ............... 35,081 34,966 34,851 34,709
MERIT Series 13 ................. 3,831 3,712 3,557 3,346
MERIT Series 14-1 ............... 7,422 7,397 7,373 7,343
MERIT Series 14-2 ............... 2,626 2,617 2,609 2,598
MCA One Series 1 ................ 2,044 1,711 1,455 1,214
CCA One Series 2 ................ 9,653 8,005 6,781 5,659
CCA One Series 3 ................ 25,396 20,755 17,134 13,687
- --------------------------------- -------- -------- -------- --------
$143,530 $130,639 $120,384 $110,289
- --------------------------------- -------- -------- -------- --------

Securities. Securities consist primarily of adjustable-rate and fixed-rate
mortgage-backed securities. Securities also include derivative and residual
securities. Securities increased during the three months ended March 31, 2002 by
$0.7 million to $6.2 million at March 31, 2002 from $5.5 million at December 31,
2001 due primarily to the call of a fixed-rate mortgage-backed security,
previously sold by the Company to a third party.

Other investments. Other investments at March 31, 2002 consist primarily of
delinquent property tax receivables. Other investments decreased from $63.6
million at December 31, 2001 to $61.8 million at March 31, 2002. This decrease
is primarily the result of pay-downs of delinquent property tax receivables
which totaled $4.0 million during the quarter, partially offset by the
amortization of discounts recorded to accumulated other comprehensive loss.

Loans. Loans increased from $7.3 million at December 31, 2001 to $7.4 million at
March 31, 2002 as the result of the repurchase of certain single-family loans
from one of the Company's collateralized securities for inclusion in the
securitization the Company completed in April 2002. This increase was partially
offset by paydowns on loans during the first three months of 2002.

Non-recourse debt. Collateralized bonds issued by the Company are recourse only
to the assets pledged as collateral, and are otherwise non-recourse to the
Company. Collateralized bonds decreased from $2.3 billion at December 31, 2001
to $2.1 billion at March 31, 2002. This decrease was primarily a result of
principal payments received on the associated collateral pledged which were used
to pay down the collateralized bonds in accordance with the respective
indentures.

Recourse debt. Recourse debt decreased to $47.0 million at March 31, 2002 from
$58.1 million at December 31, 2001. This decrease was due to $11.1 million of
purchases on the Senior Notes due July 2002.

Shareholders' equity. Shareholders' equity increased to $243.9 million at March
31, 2002 from $242.1 million at December 31, 2001. This increase was a combined
result of a $1.3 million decrease in the net unrealized loss on investments
available-for-sale from $14.8 million at December 31, 2001 to $13.5 million at
March 31, 2002 and net income of $0.5 million during the three months ended
March 31, 2002.


15
RESULTS OF OPERATIONS



- -----------------------------------------------------------------------------------------------
Three Months Ended
March 31,
--------------------------------
(amounts in thousands except per share information) 2002 2001
- -----------------------------------------------------------------------------------------------


Net interest margin $ 3,857 $ 5,623
Net (loss) gain on sales, write-downs, impairment charges
and litigation (2,055) 5,304
Trading gains - 238
General and administrative expenses 1,894 1,844
Extraordinary item -gain on extinguishment of debt 377 2,271
Net income 481 11,649

Basic and diluted (loss) income per common share before $ (0.21) $ 0.54
extraordinary gain

Basic and diluted net (loss) income per common share $ (0.18) $ 0.74

- -----------------------------------------------------------------------------------------------


Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001.
The decrease in net income and net income per common share during the three
months ended March 31, 2002 as compared to the same period in 2001 is primarily
the result of several positive non-recurring items in 2001, including the
favorable settlement of litigation, and an extraordinary gain related to the
early extinguishment of $11.7 million of the Company's Senior Notes.

Net interest margin for the three months ended March 31, 2002 decreased to $3.9
million from $5.6 million for the same period for 2001. This decrease was
primarily the result of an increase in provision for losses to $5.6 million
during the three months ended March 31, 2002 compared to $4.8 million during the
three months ended March 31, 2001. This increase in provision for losses was a
result of increasing the reserve for losses on various manufactured housing loan
pools pledged as collateral for collateralized bonds where the Company has
retained credit risk. In addition, average interest-earning assets declined from
$3.2 billion for the three months ended March 31, 2001 to $2.5 billion for the
three months ended March 31, 2002. These decreases were partially offset by an
increase in the net interest spread from 0.88% for the three months ended March
31, 2001 to 1.21% for the three months ended March 31, 2002. Further, accrual of
interest on the Company's investment in delinquent property tax receivables was
discontinued in 2002.

Net gain on sales, write-downs, impairment charges and litigation declined by
$7.4 million, from a gain of $5.3 million during the three months ended March
31, 2001, to a loss of $2.1 million during the three months ended March 31,
2002. During the three months ended March 31, 2001, the Company favorably
resolved litigation for $7.1 million, net of legal expenses.

The following table summarizes the average balances of interest-earning assets
and their average effective yields, along with the average interest-bearing
liabilities and the related average effective interest rates, for each of the
periods presented.


16


AVERAGE BALANCES AND EFFECTIVE INTEREST RATES

- ------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
-----------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------------------------
Average Effective Average Effective
Balance Rate Balance Rate
----------------- ----------- ---------------- ------------


Interest-earning assets: (1)
Collateral for collateralized bonds (2) $ 2,365,993 7.22% $ 3,075,898 7.95%
Securities 5,340 9.16% 11,878 9.82%
Other investments 78,119 (0.12)% 36,131 16.70%
Loans 2,967 11.79% 6,314 14.20%
Cash 7,280 2.0% 37,780 5.84%
----------------- ----------- ---------------- ------------
Total interest-earning assets $ 2,459,699 6.98% $ 3,168,001 8.0504%
================= =========== ================ ============

Interest-bearing liabilities:
Non-recourse debt (3) $ 2,192,492 5.72% $ 2,781,292 7.13%
Recourse debt secured by collateralized bonds
retained - -% 31,265 6.76%
----------------- ----------- ---------------- ------------
2,192,492 5.72% 2,812,557 7.12%

Other recourse debt - secured 50,589 8.13% 99,038 8.25%
----------------- ----------- ---------------- ------------
Total interest-bearing liabilities $ 2,243,081 5.78% $ 2,911,595 7.16%
================= =========== ================ ============
Net interest spread on all investments (3) 1.21% 0.88%
=========== ============
Net yield on average interest-earning assets (3) 1.71% 1.46%
=========== ============

- ------------------------------------------------------------------------------------------------------------------


(1) Average balances exclude adjustments made in accordance with Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" to record available-for-sale
securities at fair value.
(2) Average balances exclude funds held by trustees of $534 and $437 for the
three months ended March 31, 2002 and 2001, respectively.
(3) Effective rates are calculated excluding non-interest related
collateralized bond expenses and provision for credit losses. If included,
the net yield on average interest-earning assets would be 0.63% and 0.74%
for the three months ended March 31, 2002 and 2001, respectively.

The net interest spread increased 0.33%, to 1.21% for the three months ended
March 31, 2002 from 0.88% for the same period in 2001. The net interest spread
for the three months ended March 31, 2002 also improved relative to the same
period in 2001, to 1.71% from 1.46%. The improvement in the Company's net
interest spread can be attributed to a decline in the cost of interest-bearing
liabilities from the respective 2001 period, which have declined as a result in
the decline of One-Month LIBOR due to the reduction in short-term interest rates
by the Federal Reserve. This was partially offset by the discontinuance of
accrual of interest on the Company's investment in delinquent property tax
receivables in 2001. The majority of the Company's variable-rate
interest-bearing liabilities are priced relative to One-Month LIBOR.
Interest-bearing liability costs declined 1.38% for the three month period ended
March 31, 2002, compared to the same period in 2001. For the three month period
ended March 31, 2002, there has been a lesser decline in the effective
interest-earning yield on the collateral for collateralized bonds due to the
`reset' lag and `floors' (the loans generally adjust or `reset' every six or
twelve months and are generally limited to maximum adjustments upwards or
downwards of 1% each six months) on the approximate $576 million in
single-family ARM loans that comprise a portion of the collateral for
collateralized bonds. The Company would expect its net interest spread on its
interest-earning assets for the balance of 2002 to decrease as rates on
adjustable collateral loans continue to adjust downward while rates on
collateralized bonds remain flat or begin to adjust upward. The average
One-Month LIBOR rate declined to 1.85% for the three-month period ended March
31, 2002 from 5.51% for the three-month period ended March 31, 2001.


17
From March 31, 2001 to March 31, 2002, average interest-earning assets declined
$708 million, or approximately 22%. A large portion of such reduction relates to
paydowns on the Company's adjustable-rate single-family mortgage loans. The
Company's portfolio as of March 31, 2002 consists of $576.1 million of
adjustable rate assets and $1.7 billion of fixed-rate assets. The Company
currently finances approximately $186.7 million of the fixed-rate assets with
non-recourse LIBOR based floating-rate liabilities. Assuming short-term interest
rates stay at or about current levels, the single-family ARM loans should
continue to reset downwards in rate (subject to the floors) which will have the
impact of reducing net interest spread in future periods.

Interest Income and Interest-Earning Assets. At March 31, 2002, $1.7 billion of
the investment portfolio consists of loans which pay a fixed-rate of interest.
Also at March 31, 2002, approximately $576.1 million of the investment portfolio
is comprised of loans or securities that have coupon rates which adjust over
time (subject to certain periodic and lifetime limitations) in conjunction with
changes in short-term interest rates. Approximately 70% of the ARM loans
underlying the ARM securities and collateral for collateralized bonds are
indexed to and reset based upon the level of six-month LIBOR; approximately 17%
of the ARM loans are indexed to and reset based upon the level of the one-year
Constant Maturity Treasury (CMT) index. The following table presents a
breakdown, by principal balance, of the Company's collateral for collateralized
bonds and ARM and fixed mortgage securities by type of underlying loan. This
table excludes derivative and residual securities, other investments and loans
held for sale.

INVESTMENT PORTFOLIO COMPOSITION (1)
($ in millions)

- --------------- ----------- ------------- -------------- ------------ ----------
Other Indices
LIBOR Based CMT Based Based Fixed-Rate
ARM Loans ARM Loans ARM Loans Loans Total
- --------------- ----------- ------------- -------------- ------------ ----------
2000, Quarter 1 $ 976.7 $ 362.6 $ 117.4 $ 2,029.4 $ 3,486.1
2000, Quarter 2 902.5 375.8 110.8 1,998.2 3,387.3
2000, Quarter 3 830.1 348.9 103.2 1,960.8 3,243.0
2000, Quarter 4 758.6 309.9 97.4 1,926.3 3,092.2
2001, Quarter 1 688.4 271.6 91.3 1,892.8 2,944.1
2001, Quarter 2 604.4 224.0 81.3 1,852.7 2,762.4
2001, Quarter 3 527.4 173.2 78.2 1,802.4 2,581.2
2001, Quarter 4 472.4 144.6 73.6 1,765.8 2,456.4
2002, Quarter 1 410.2 100.2 65.7 1,725.1 2,301.2
- --------------- ----------- ------------- -------------- ------------ ----------

(1) Includes only the principal amount of collateral for collateralized bonds,
ARM securities and fixed-rate mortgage securities.

The average asset yield is reduced for the amortization of premiums, net of
discounts on the investment portfolio. As indicated in the table below, net
premium on the collateral for collateralized bonds, ARM securities, fixed-rate
mortgage securities at March 31, 2002 was $20.0 million, or approximately 0.89%
of the aggregate balance of collateral for collateralized bonds, ARM securities
and fixed-rate securities. The $20.0 million net premium consists of gross
collateral premiums of $45.2 million, less gross collateral discounts of $25.2
million. Of the $45.2 million in gross premiums on collateral, $31.9 million
relates to the premium on multifamily and commercial mortgage loans with a
principal balance of $799.5 million at March 31, 2002, and that have average
initial prepayment lockouts or yield maintenance for at least ten years. Such
prepayment lockouts and yield maintenance provisions generally extend to at
least 2008. Net premium on such multifamily and commercial loans is $25.9
million. Amortization expense as a percentage of principal paydowns has
increased to 1.59% for the three months ended March 31, 2002 from 1.43% for the
same period in 2001. The principal prepayment rate for the Company (indicated in
the table below as "CPR Annualized Rate") was approximately 26% for the three
months ended March 31, 2002. CPR or "constant prepayment rate" is a measure of
the annual prepayment rate on a pool of loans.


18
PREMIUM BASIS AND AMORTIZATION
($ in millions)

---------------------------------------------------------------------------

CPR Amortization
Net Amortization Annualized Principal Expense as a %of
Premium Expense Rate Paydowns Principal Paydowns
- --------------------------------------------------------------------------------
2000, Quarter 1 $ 36.2 $ 2.0 18% $ 122.6 1.64%
2000, Quarter 2 34.1 2.1 18% 131.6 1.56%
2000, Quarter 3 32.0 2.1 18% 134.1 1.59%
2000, Quarter 4 30.1 1.9 20% 134.7 1.41%
2001, Quarter 1 28.0 2.0 23% 142.6 1.43%
2001, Quarter 2 25.7 2.3 28% 174.6 1.31%
2001, Quarter 3 23.7 2.1 28% 162.9 1.30%
2001, Quarter 4 22.4 1.8 24% 122.0 1.46%
2002, Quarter 1 20.0 2.4 26% 150.9 1.59%

Credit Exposures. The Company invests in collateralized bonds or pass-through
securitization structures. Generally these securitization structures use
over-collateralization, subordination, third-party guarantees, reserve funds,
bond insurance, mortgage pool insurance or any combination of the foregoing as a
form of credit enhancement. The Company generally has retained a limited portion
of the direct credit risk in these securities. In most instances, the Company
retained the "first-loss" credit risk on pools of loans that it has securitized.

The following table summarizes the aggregate principal amount of collateral for
collateralized bonds and ARM and fixed-rate mortgage pass-through securities
outstanding; the direct credit exposure retained by the Company (represented by
the amount of over-collateralization pledged and subordinated securities owned
by the Company), net of the credit reserves and discounts maintained by the
Company for such exposure; and the actual credit losses incurred for each year.
For 2001, the table includes any subordinated security retained by the Company,
whereas in prior years the table included only subordinated securities rated
below "BBB" by one of the nationally recognized rating agencies.

The table excludes other forms of credit enhancement from which the Company
benefits, and based upon the performance of the underlying loans, may provide
additional protection against losses as discussed above in Investment Portfolio
Risks. This table also excludes any risks related to representations and
warranties made on single-family loans funded by the Company and securitized in
mortgage pass-through securities generally funded prior to 1995. This table also
excludes any credit exposure on loans and other investments.

The Company has settled a dispute with the counterparty to the $30.3 million in
reimbursement guarantees. Such guarantees are payable when cumulative loss
trigger levels are reached on certain of the Company's single-family mortgage
loan securitizations. The Company was paid $0.75 million in settlement of $2.4
million in claims which had been carried on the Company's books at $1.1 million.
As part of the settlement, certain trigger levels were reset and the reasons
that a loss in the future would be a `non-qualifying' loss were significantly
narrowed. As of March 31, 2002, $122 million of loans were subject to such
reimbursement guarantees.


19
CREDIT RESERVES AND ACTUAL CREDIT LOSSES
($ in millions)

- -----------------------------------------------------------------------------
OUTSTANDING CREDIT EXPOSURE, ACTUAL CREDIT EXPOSURE, NET
LOAN PRINCIPAL NET OF CREDIT CREDIT OF CREDIT RESERVES TO
BALANCE RESERVES LOSSES OUTSTANDING LOAN BALANCE
- -----------------------------------------------------------------------------
2000, Quarter 1 $ 3,679.6 $ 166.3 $ 4.8 4.52%
2000, Quarter 2 3,677.3 195.5 5.4 5.32%
2000, Quarter 3 3,503.1 172.7 6.8 4.93%
2000, Quarter 4 3,245.3 186.6 9.6 5.75%
2001, Quarter 1 3,137.0 142.0 8.1 4.53%
2001, Quarter 2 2,948.0 135.8 8.2 4.61%
2001, Quarter 3 2,771.2 130.4 9.2 4.71%
2001, Quarter 4 2,588.4 153.5 7.1 5.93%
2002, Quarter 1 2,423.0 141.8 6.0 5.85%
- -------------------------------------------------------------------------------

The following table summarizes single family mortgage loan, manufactured housing
loan and commercial mortgage loan delinquencies as a percentage of the
outstanding collateral balance for those securities in which Dynex has retained
a portion of the direct credit risk. The delinquencies as a percentage of the
outstanding collateral balance have increased to 1.96% at March 31, 2002 from
1.75% at March 31, 2001. The Company monitors and evaluates its exposure to
credit losses and has established reserves based upon anticipated losses,
general economic conditions and trends in the investment portfolio. As of March
31, 2002, management believes the credit reserves are sufficient to cover
anticipated losses that may occur as a result of current delinquencies presented
in the table below.

DELINQUENCY STATISTICS (1)

- --------------------------------------------------------------------------------
60 TO 90 DAYS 90 DAYS AND OVER
DELINQUENT DELINQUENT(2) TOTAL
- --------------------------------------------------------------------------------
2000, Quarter 1 0.26% 1.46% 1.72%
2000, Quarter 2 0.34% 1.52% 1.86%
2000, Quarter 3 0.35% 1.61% 1.96%
2000, Quarter 4 0.37% 1.59% 1.96%
2001, Quarter 1 0.20% 1.55% 1.75%
2001, Quarter 2 0.29% 1.45% 1.74%
2001, Quarter 3 0.33% 1.42% 1.75%
2001, Quarter 4 0.28% 1.50% 1.78%
2002, Quarter 1 0.29% 1.67% 1.96%
- --------------------------------------------------------------------------------

(1) Excludes other investments and loans held for sale or securitization.
(2) Includes foreclosures, repossessions and REO.

Recent Accounting Pronouncements. In June 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the
initial recognition and measurement of intangible assets acquired outside of a
business combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that intangible assets
with finite useful lives be amortized and that goodwill and intangible assets
with indefinite lives will not be amortized, but will rather be tested at least
annually for impairment. As the Company has no goodwill or intangible assets
which it is amortizing, the adoption of SFAS No. 142 did not have any effect on
the financial position, results of operations or cash flows of the Company.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for


20

obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS No. 143 is effective for fiscal years
beginning after June 15, 2002. The Company does not believe the adoption of SFAS
No. 143 will have a significant impact on the financial position, results of
operations or cash flows of the Company.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets" which supercedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of Accounting Principles Board (APB) Opinion
No. 30, "Reporting the Results of Operations - Reporting and Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB 30)" for the disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. SFAS No. 144 retains many of the provisions of SFAS No. 121, but
addresses certain implementation issues associated with that Statement. The
adoption of SFAS No. 144 did not have a significant impact on the financial
position, results of operations or cash flows of the Company.

In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
Effective January 1, 2003, SFAS No. 145 requires gains and losses from the
extinguishment or repurchase of debt to be classified as extraordinary items
only if they meet the criteria for such classification in APB 30. Until January
1, 2003, gains and losses from the extinguishment or repurchase of debt must be
classified as extraordinary items, as Dynex has done. After January 1, 2003, any
gain or loss resulting from the extinguishment or repurchase of debt classified
as an extraordinary item in a prior period that does not meet the criteria for
such classification under APB Opinion No. 30 must be reclassified. The Company
is in the process of evaluating SFAS No. 145 but believes it will not have a
significant impact on the financial position, results of operations or cash
flows of the Company.


LIQUIDITY AND CAPITAL RESOURCES

The Company has historically financed its operations from a variety of sources.
These sources have included cash flow generated from the investment portfolio,
including net interest income and principal payments and prepayments, common
stock offerings through the dividend reinvestment plan, short-term warehouse
lines of credit with commercial and investment banks, repurchase agreements and
the capital markets via the asset-backed securities market (which provides
long-term non-recourse funding of the investment portfolio via the issuance of
collateralized bonds). Historically, cash flow generated from the investment
portfolio has satisfied its working capital needs, and the Company has had
sufficient access to capital to fund its loan production operations, on both a
short-term (prior to securitization, and recourse) and long-term (after
securitization, and non-recourse) basis. However, market conditions since
October 1998 have substantially reduced the Company's access to capital. The
Company has been unable to access short-term warehouse lines of credit, and,
with the exception for the resecuritization of seasoned loans in its investment
portfolio, has been unable to efficiently access the asset-backed securities
market to meet its long-term funding needs. Largely as a result of its inability
to access additional capital, the Company sold its manufactured housing and
model home purchase/leaseback operations in 1999, and ceased issuing new
commitments in its commercial lending operations. Since 1999, the Company has
focused on substantially reducing its recourse debt and minimizing its capital
requirements. The Company has made substantial progress in both areas since
1999, and based upon its available cash, the expected investment portfolio cash
flows, and the proceeds from the resecuritization of assets completed in April
2002, the Company anticipates that it will repay all of its recourse debt
obligations in accordance with their respective terms. Such repayment is
expected in July 2002. At such time, the Company expects that it would again
have access to short-term credit lines.

Non-recourse Debt. Dynex, through limited-purpose finance subsidiaries, has
issued non-recourse debt in the form of collateralized bonds to fund the
majority of its investment portfolio. The obligations under the collateralized
bonds are payable solely from the collateral for collateralized bonds and are
otherwise non-recourse to Dynex. Collateral for collateralized bonds is not
subject to margin calls. The maturity of each class of collateralized bonds is


21
directly affected by the rate of principal prepayments on the related
collateral. Each series is also subject to redemption according to specific
terms of the respective indentures, generally on the earlier of a specified date
or when the remaining balance of the bonds equals 35% or less of the original
principal balance of the bonds. At March 31, 2002, Dynex had $2.1 billion of
collateralized bonds outstanding.

Recourse Debt. As of March 31, 2002, the Company has $46.8 million
outstanding of its senior notes issued in July 1997 and due July 15, 2002 (the
"Senior Notes"). On March 30, 2001, the Company entered into an amendment to the
related indenture governing the Senior Notes (the "Supplemental Indenture")
whereby the Company pledged to the Trustee of the Senior Notes substantially all
of the Company's unencumbered assets and the stock of its material subsidiaries.
In consideration of this pledge, the indenture was further amended to provide
for the release of the Company from certain covenant restrictions in the
indenture, and specifically provided for the Company's ability to make
distributions on its capital stock in an amount not to exceed the sum of (a) $26
million, (b) the cash proceeds of any "permitted subordinated indebtedness", (c)
the cash proceeds of the issuance of any "qualified capital stock", and (d) any
distributions required in order for the Company to maintain its REIT status.
Pursuant to its settlement with ACA (see Item 1 below), the Company is not
permitted to make any further distributions on its capital stock pursuant to
clause (a) above. In addition, the Company entered into a Purchase Agreement
with holders of 50.1% of the Senior Notes which required the Company to
purchase, and such holders to sell, their respective Senior Notes at various
discounts based on a computation of the Company's available cash. The discounts
provided for under the Purchase Agreement are as follows: by April 15, 2001,
10%; by July 15, 2001, 8%; by October 15, 2001, 6%; by January 15, 2002, 4%; by
March 1, 2002, 2%; thereafter until maturity, 0%. Through March 31, 2002, the
Company has retired $50,420 of Senior Notes for $46,297 in cash under the
Purchase Agreement, and the Company had no further obligations under such
Purchase Agreement. In April, 2002, an additional $550 of Senior Notes were
purchased in the open market at a discount of 0.4%.

The Company's ability to incur additional indebtedness has been substantially
limited by the Supplemental Indenture. The only remaining recourse debt of the
Company is the Senior Notes. Based on available cash, the proceeds of the
securitization completed in April 2002, and a pro-forma analysis of cash flows
from its investment portfolio, the Company anticipates that the Senior Notes
will be repaid in accordance with their contractual terms, although no complete
assurance can be given of such repayment.

On April 25, 2002, the Company completed a securitization where it issued $605
million of collateralized bonds. These bonds were collateralized by
single-family loans aggregating $602 million, $447 million of which were loans
already owned by the Company and $155 million of which represented new loans
from the purchase of mortgage backed securities from third parties pursuant to
certain call rights owned by the Company. The transaction will be accounted for
as a financing; thus the loans and associated bonds will be included in the
Company's second quarter 2002 consolidated balance sheet as assets and
liabilities of the Company.


22
TABLE 1
NON-GAAP NET BALANCE SHEET (1)
($ IN THOUSANDS)

MARCH 31,
2002
-----------------

ASSETS
Investments:
Collateral for collateralized bonds $ 2,310,625
Less: Collateralized bonds issued (2,118,260)
-----------------
Net investment in collateralized bonds 192,365
Securities 6,190
Other investments 61,780
Loans held for sale 7,428
-----------------
267,763

Cash, including restricted 17,016
Accrued interest receivable 251
Other assets 8,082
-----------------
Total Assets $ 293,112
=================

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable 46,975
Accrued interest payable 771
Other liabilities 1,477
-----------------
Total Liabilities 49,223
-----------------

Shareholders' Equity:
Preferred stock, par value $.01 per share 94,588

Common stock, par value $.01 per share, 109
Additional paid-in capital 364,740
Accumulated other comprehensive loss (13,527)
Accumulated deficit (202,021)
-----------------
Total Shareholders' Equity 243,889
-----------------
Total Liabilities and Shareholders' Equity $ 293,112
=================

(1) This presents the balance sheet where the collateralized bonds are "netted"
against the collateral for collateralized bonds. This presentation does not
comply with generally accepted accounting principles applicable to the
Company's transactions. Management has included this table to illustrate
the Company's net investment in the collateralized bonds, which represents
its economic interest in the collateralized bond securities.


23
FORWARD-LOOKING STATEMENTS

Certain written statements in this Form 10-Q made by the Company, that are not
historical fact constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such forward-looking statements may
involve factors that could cause the actual results of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. The Company cautions the public not to place
undue reliance on forward-looking statements, which may be based on assumptions
and anticipated events that do not materialize. The Company does not undertake,
and the Securities Litigation Reform Act specifically relieves the Company from,
any obligation to update any forward-looking statements.

Factors that may cause actual results to differ from historical results or from
any results expressed or implied by forward-looking statements include the
following:

Economic Conditions. The Company is affected by general economic conditions. The
risk of defaults and credit losses could increase during an economic slowdown or
recession. This could have an adverse effect on the Company's financial
performance and the performance on the Company's securitized loan pools.

Capital Resources. The Company will rely on available cash and cash flow from
its investment portfolio to fund its operations to repay the remaining
outstanding Senior Notes due July 15, 2002. The Company may be unable to repay
such notes when due in the event of a material decline in cash flow in May or
June 2002. Cash flows from our portfolio are subject to fluctuation due to
changes in interest rates, repayment rates and default rates and related losses.

Interest Rate Fluctuations. The Company's income depends on its ability to earn
greater interest on its investments than the interest cost to finance these
investments. Interest rates in the markets served by the Company generally rise
or fall with interest rates as a whole. A majority of the loans currently
pledged as collateral for collateralized bonds by the Company are fixed-rate.
The Company currently finances these fixed-rate assets through non-recourse
debt, approximately $186.7 million of which is variable rate. In addition, a
significant amount of the investments held by the Company is adjustable-rate
collateral for collateralized bonds. These investments are financed through
non-recourse long-term collateralized bonds. The net interest spread for these
investments could decrease materially during a period of rapidly rising
short-term interest rates, since the investments generally have interest rates
which reset on a delayed basis and have periodic interest rate caps, whereas the
related borrowing have no delayed resets or such interest rate caps.

Defaults. Defaults by borrowers on loans retained by the Company may have an
adverse impact on the Company's financial performance, if actual credit losses
differ materially from estimates made by the Company. The allowance for losses
is calculated on the basis of historical experience and management's best
estimates. Actual default rates or loss severity may differ from the Company's
estimate as a result of economic conditions. In particular, the default rate and
loss severity on the Company's portfolio of manufactured housing loans has been
higher than initially estimated. Actual defaults on ARM loans may increase
during a rising interest rate environment. The Company believes that its
reserves are adequate for such risks on loans that were delinquent as of March
31, 2002.

Third-party Servicers. Third-party servicers service the majority of the
Company's investment portfolio. To the extent that these servicers are
financially impaired, the performance of the Company's investment portfolio may
deteriorate, and defaults and credit losses may be greater than estimated.

Prepayments. Prepayments by borrowers on loans securitized by the Company may
have an adverse impact on the Company's financial performance. Prepayments are
expected to increase during a declining interest rate or flat yield curve
environment. The Company's exposure to rapid prepayments is primarily (i) the
faster amortization of premium on the investments and, to the extent applicable,
amortization of bond discount, and (ii) the replacement of investments in its
portfolio with lower yield securities.


24
Depository Institution Strategy. The Company intends to explore the formation or
acquisition of a depository institution. However, the pursuit of this strategy
is subject to the outcome of the Company's investigation. No business plan has
been prepared for such strategy. Therefore, any forward-looking statement made
in the report is subject to the outcome of a variety of factors that are unknown
at this time.

Competition. The financial services industry is a highly competitive market.
Increased competition in the market has adversely affected the Company, and may
continue to do so.

Regulatory Changes. The Company's businesses as of March 31, 2002 are not
subject to any material federal or state regulation or licensing requirements.
However, changes in existing laws and regulations or in the interpretation
thereof, or the introduction of new laws and regulations, could adversely affect
the Company and the performance of the Company's securitized loan pools or its
ability to collect on its delinquent property tax receivables.

Risks and Uncertainties. See Note 1 to the Company's audited financial
statements for the year ended December 31, 2001.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument due to fluctuations in
interest and foreign exchange rates and in equity and commodity prices. Market
risk is inherent to both derivative and non-derivative financial instruments,
and accordingly, the scope of the Company's market risk management extends
beyond derivatives to include all market risk sensitive financial instruments.
As a financial services company, net interest margin comprises the primary
component of the Company's earnings. Additionally, cash flow from the investment
portfolio represents the primary component of the Company's incoming cash flow.
The Company is subject to risk resulting from interest rate fluctuations to the
extent that there is a gap between the amount of the Company's interest-earning
assets and the amount of interest-bearing liabilities that are prepaid, mature
or re-price within specified periods. The Company's strategy has been to
mitigate interest rate risk through the creation of a diversified investment
portfolio of high quality assets that, in the aggregate, preserves the Company's
capital base while generating stable income and cash flow in a variety of
interest rate and prepayment environments.

The Company monitors the aggregate cash flow, projected net yield and market
value of its investment portfolio under various interest rate and prepayment
assumptions. While certain investments may perform poorly in an increasing or
decreasing interest rate environment, other investments may perform well, and
others may not be impacted at all.

The Company focuses on the sensitivity of its cash flow, and measures such
sensitivity to changes in interest rates. Changes in interest rates are defined
as instantaneous, parallel, and sustained interest rate movements in 100 basis
point increments. The Company estimates its net interest margin cash flow for
the next twenty-four months assuming no changes in interest rates from those at
period end. Once the base case has been estimated, cash flows are projected for
each of the defined interest rate scenarios. Those scenario results are then
compared against the base case to determine the estimated change to cash flow.

The following table summarizes the Company's net interest margin cash flow
sensitivity analysis as of March 31, 2002. This analysis represents management's
estimate of the percentage change in net interest margin cash flow given a
parallel shift in interest rates, as discussed above. Other investments are
excluded from this analysis because they are not interest rate sensitive. The
"Base" case represents the interest rate environment as it existed as of March
31, 2002. At March 31, 2002, one-month LIBOR was 2.33% and six-month LIBOR was
1.88%. The analysis is heavily dependent upon the assumptions used in the model.
The effect of changes in future interest rates, the shape of the yield curve or
the mix of assets and liabilities may cause actual results to differ
significantly from the modeled results. In addition, certain financial
instruments provide a degree of "optionality." The most significant option


25

affecting the Company's portfolio is the borrowers' option to prepay the loans.
The model applies prepayment rate assumptions representing management's estimate
of prepayment activity on a projected basis for each collateral pool in the
investment portfolio. The model applies the same prepayment rate assumptions for
all five cases indicated below. The extent to which borrowers utilize the
ability to exercise their option may cause actual results to significantly
differ from the analysis. Furthermore, the projected results assume no additions
or subtractions to the Company's portfolio, and no change to the Company's
liability structure. Historically, there have been significant changes in the
Company's assets and liabilities, and there are likely to be such changes in the
future.

% CHANGE IN NET
BASIS POINT INTEREST MARGIN
INCREASE (DECREASE) CASH FLOW FROM
IN INTEREST RATES BASE CASE
------------------------------ ---------------------------
+200 (5.1)%
+100 (2.6)%
Base
-100 2.6%
-200 5.1%

Approximately $576 million of the Company's investment portfolio as of March 31,
2002 is comprised of loans or securities that have coupon rates which adjust
over time (subject to certain periodic and lifetime limitations) in conjunction
with changes in short-term interest rates. Approximately 70% and 17% of the ARM
loans underlying the Company's ARM securities and collateral for collateralized
bonds are indexed to and reset based upon the level of six-month LIBOR and
one-year CMT, respectively.

Generally, during a period of rising short-term interest rates, the Company's
net interest spread earned on its investment portfolio will decrease. The
decrease of the net interest spread results from (i) the lag in resets of the
ARM loans underlying the ARM securities and collateral for collateralized bonds
relative to the rate resets on the associated borrowings and (ii) rate resets on
the ARM loans which are generally limited to 1% every six months or 2% every
twelve months and subject to lifetime caps, while the associated borrowings have
no such limitation. As short-term interest rates stabilize and the ARM loans
reset, the net interest margin may be restored to its former level as the yields
on the ARM loans adjust to market conditions. Conversely, net interest margin
may increase following a fall in short-term interest rates. This increase may be
temporary as the yields on the ARM loans adjust to the new market conditions
after a lag period. In each case, however, the Company expects that the increase
or decrease in the net interest spread due to changes in the short-term interest
rates to be temporary. The net interest spread may also be increased or
decreased by the proceeds or costs of interest rate swap, cap or floor
agreements, to the extent that the Company has entered into such agreements.

The remaining portion of the Company's investment portfolio as of March 31,
2002, approximately $1.73 billion, is comprised of loans or securities that have
coupon rates that are fixed. The Company has substantially limited its interest
rate risk on such investments through (i) the issuance of fixed-rate
collateralized bonds which approximated $1.3 billion as of March 31, 2002, and
(ii) equity, which was $243.9 million. Overall, the Company's interest rate risk
is primarily related both to the rate of change in short term interest rates,
and to the level of short-term interest rates.



PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

GLS Capital, Inc. ("GLS"), a subsidiary of the Company, together with the County
of Allegheny, Pennsylvania ("Allegheny County"), were defendants in a lawsuit in
the Commonwealth Court of Pennsylvania (the "Commonwealth Court") wherein the
plaintiffs challenged the right of Allegheny County and GLS to collect certain


26
interest, costs and expenses related to delinquent property tax receivables in
Allegheny County. This lawsuit was related to the purchase by GLS of delinquent
property tax receivables from Allegheny County in 1997, 1998, and 1999 for
approximately $58.3 million. In July 2001, the Commonwealth Court ruling
addressed, among other things, (i) the right of the Company to charge to the
delinquent taxpayer a rate of interest of 12% versus 10% on the collection of
its delinquent property tax receivables, (ii) the charging of attorney's fees to
the delinquent taxpayer for the collection of such tax receivables, and (iii)
the charging to the delinquent taxpayer of certain other fees and costs. The
Commonwealth Court remanded for further consideration to the Court of Common
Pleas items (i) and (iii), and ruled that neither Allegheny County nor GLS had
the right to charge attorney's fees to the delinquent taxpayer related to the
collection of such tax receivables, reversing the Court of Common Pleas
decision. The Pennsylvania Supreme Court has accepted the Application for
Extraordinary Jurisdiction filed by Allegheny County and GLS. No damages have
been claimed in the action; however, the decision may impact the ultimate amount
recoverable on the delinquent property tax receivables, including attorney fees
incurred in the collection process. To date, GLS has incurred attorneys fees of
approximately $2.0 million related to foreclosures on such delinquent property
tax receivables, approximately $1.0 million of which have been reimbursed to GLS
by the taxpayer or through liquidation of the underlying real property.

The Company is also subject to other lawsuits or claims which have arisen in the
ordinary course of its business, some of which seek damages in amounts which
could be material to the financial statements. Although no assurance can be
given with respect to the ultimate outcome of any such litigation or claim, the
Company believes the resolution of such lawsuits or claims will not have a
material effect on the Company's consolidated balance sheet, but could
materially affect consolidated results of operations in a given year.


ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

See Note 9 to accompanying condensed consolidated financial statements
in Part I Item 1.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable


ITEM 5. OTHER INFORMATION

None


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 10.10 Terms of Employment between Dynex Capital, Inc. and
Mr. Stephen J. Benedetti dated March 18, 2002.


(b) Reports on Form 8-K None.



27



- 28 -
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DYNEX CAPITAL, INC.




By: /s/ Stephen J. Benedetti
-----------------------------------------
Stephen J. Benedetti
Executive Vice President
(Principal Executive Officer)

Dated: October 7, 2002


28